Private property insurance remains stable in Irene’s wake

by Hilary Niles August 28, 2013 vtdigger.org If Tropical Storm Irene had brought more wind than water to Vermont in 2011, the state’s insurance landscape might look a lot different today.
Most of the damage from Irene, as well as 2011â ²s other two federally declared disasters and most storms since, was caused by flooding. That damage is excluded from homeowner insurance policies ‘ a fact that can make recovery hard to pay for, but in Vermont’s case has helped keep the state’s property and casualty insurance rates stable while federal flood insurance rates skyrocket.
‘If it had been a traditional hurricane with winds of 100 or 150 miles per hour and trees toppling on houses and roofs blowing off, you’d see a lot more rate increases,’ said Josh Fitzhugh, president and CEO of Vermont-based insurance company Union Mutual.
As it stands, much of the storm damage from recent years has been absorbed by the National Flood Insurance Program. Fitzhugh said private insurers might have had to pass costs on to policyholders if flood claims had not dominated the storm damage. ‘But there’s less need for rate increases due to the nature of storm,’ he said.
Home base
An insurance company’s policies and rates are regulated state by state wherever the policies are sold, but the business itself is regulated by the state in which it’s incorporated. Regulation of internal operations and solvency, therefore, falls to the home state. The Vermont Department of Financial Regulation’s insurance division audits all domestic insurance companies every year.
Susan Donegan, commissioner of the state’s Department of Financial Regulation, said property and casualty insurance rates in Vermont since Irene reflect normal inflationary cost increases. On average, they’ve gone up between 3.2 and 4.4 percent per year since 2011.
‘To us, that’s a very stable market,’ Donegan said. ‘We haven’t seen two-digit increases like some states.’
Indeed, even before 2011, Vermont’s property insurance rates suffered relatively few fluctuations compared to neighboring states.
Home-field advantage
It’s not just weather that drives insurance rates, though. Fitzhugh attributes ongoing stability primarily to two things: the predominance of domestic insurance carriers in Vermont, and a consistent regulatory environment.
A lot of Vermont’s insurance policies are held by ‘domestic’ companies, meaning they’re insurance carriers incorporated in Vermont. That proximity can affect the company’s relationships with customers and regulators, Fitzhugh said.
Take Rhode Island, for example. Even though Hurricane Katrina in 2005 did not devastate Rhode Island, the storm alerted many carriers to its risk.
‘It is the Ocean State, after all,’ Fitzhugh said. Many insurers raised rates there to cover their own rising costs of reinsurance. In a situation like that, some companies might even decide to pull out of the market entirely.
‘But it would take a much more cataclysmic event for a local company to decide to leave Rhode Island,’ Fitzhugh hypothesized.
An insurance company’s responsiveness to its home state plays out at the regulatory level, too.
Donegan said the morning after Tropical Storm Irene, she was on the phone with the CEOs of every domestic carrier, making sure they had agents in the field and that they brought in reinforcements to assist with the demand.
‘This is the state that not only tells us what we should be charging on policies, and gives us final sign-off,’ Fitzhugh said, ‘but it also has a role in the general supervision of the company.’ He said that, Vermont aside, ‘a company that’s domiciled in a state tends to be a bit more responsive to the regulatory requests.’
Donegan credits the private insurers for their swift and thorough response to the damages, especially praising companies that voluntarily waived penalties for delayed payments because they knew so many home financial records had been washed away and checkbooks destroyed. Proof of their service, she said, resides in an absence of consumer complaints: not a single one against a private insurer for failure to honor a claim from Tropical Storm Irene.
Comparing costs
Tropical Storm Irene produced about $18.2 million in property and casualty insurance claims, Donegan said. Most of those came from homeowner policies (2,600 claims), followed by commercial claims (1,600, many of which were for ‘business interruption’ insurance), and finally auto (622 claims).
‘It’s a lot of money,’ she said. ‘But in the overall scheme of things, the storm’s impact on the private market was not dramatic.’
Compare that to the hits the National Flood Insurance Program has taken since 2010. Between 1978 and 2010, NFIP paid out roughly $7.9 million in claims, according to Rebecca Pfeiffer, floodplain manager and assistant NFIP coordinator for the Vermont Department of Environmental Conservation.
If those claims had been filed and paid out evenly from year to year, the annual totals would average less than a quarter-million dollars each year.
Until 2011. In addition to Tropical Storm Irene in late August, severe storms and flooding in April and May earned federal disaster declarations.
In one year, Vermont’s flood insurance claims practically quintupled their historical cumulative total, reaching about $41.3 million between 2010 and 2011 alone. Subsequent flooding in 2012 piled on more claims, worth nearly $13.5 million, between 2011 and 2012.
Those figures should be taken with a grain of salt, because they’re not in ‘constant dollars.’ In other words, what cost $100 in 1978 likely would have a much higher price tag in 2012, so figures between the years can’t be compared exactly. And it’s hard to say exactly which jumps can be blamed on which storms, because claims each get filed and paid on different schedules.
But there’s no getting around the fact that 2011 was a game-changer in Vermont’s insurance landscape, and one that private carriers largely avoided.
Because private homeowner’s insurance generally doesn’t cover damage from floods, the federal flood insurance program ‘ and its policyholders ‘ were left to absorb the brunt of the impact.